Sound logic in imposing a Google tax, expanding it

With over 3 billion users on the internet and the number of internet-connected devices exceeding 12.5 billion already (surpassing the 7 billion number of human beings on the planet today)—the number of internet-connected devices is projected to be between 26 billion and 50 billion by as early as 2020—finance minister Arun Jaitley did well to impose what is colloquially called the GoogleTax in the budget, and hold out the possibility of expanding this list to other transactions such as cloud storage and even e-commerce with companies that are not registered in India. As the report of the committee set up to examine such transactions points out—the report was made public on Monday—taxing such transactions is something most countries are grappling with, but have not been able to come to a workable solution as yet with many tech companies using a maze of subsidiaries across countries to lower their tax outgo. There is also the issue of a level playing field when it comes to advertising, the issue that the budget deals with—if a local firm advertises on a local television channel or website, this gets taxed; but if the same money is given to Google, it does not since Google does not have what is called a permanent establishment (PE) in India. By putting a 6% ‘equalisation levy’, the tax treatment gets more equal.

To be sure, the levy is not the best thing to impose since, in this case, Google cannot get a tax set-off in its home country. The committee says a better solution is to tax Google—to stay with our example—by imposing a withholding tax on the payments to it, but countries like the US and the UK are struggling to find ways to do this. Also, to the extent these firms are registered in countries with whom India has tax treaties, the tax might fall foul of the treaty. Nor does the matter end with Google; if an Internet of Things (IoT) firm without a PE in India is earning lots of money from Indian users—right now, the ‘taxation’ is not being applied to B2C transactions, but if this gets large enough, it needs to—how is this to be taxed? As and when the OECD finds a suitable means to tax such companies and incomes, India can withdraw the equalisation levy and replace it with a withholding tax, but till then, this is as good a way as any other, and may even serve as a trailblazer for other countries finding ways to tax the very rapidly growing digital economy.